Markets Look Forward to Tomorrow’s US November CPI

Markets

Data on Friday suggested that the US economy remains resilient. For now, there is no reason for the Fed to support demand. The labour market in November added 199k jobs, up from 150k in October (35k downward revision of the previous two months). Data from the consumer survey were very strong. The unemployment rate declined from 3.9% to 3.7%, as job growth outpaced a strong rise in the labour force. Average hourly earnings at 0.4% M/M and 4.0% y/y stayed solid. Later, consumer confidence of the U. of Michigan even painted a ‘perfect world scenario’. Sentiment jumped sharply from 61.3 to 69.4, both by a better assessment of consumers’ current situation and expectations. At the same time, consumers see inflation easing. Expectations for the next 12 months tumbled from 4.5% to 3.1%. Expectations for 5-10-y eased from 3.2% tot 2.8%. This should comfort the Fed. Still, the data overall was strong enough for markets not further frontload aggressive Fed easing next year. US yields rose between 12.6 bps (2-y) and 4.8 bps (30-y). Markets scaled back bets for a March Fed rate cut < 50% (from 70% before the release). The price pattern on US yield markets was copied in Europe with German yields rebounding between 9.7 bps (2-y) and 6.6 bps (30-y) yield. The hope on a soft landing kept equities well bid with the US indices testing the 2023 top levels (S&P 500 + 0.41%). The Eurostoxx 50 even closed at a post-corona top (+1.1%). The dollar jumped upon the payrolls’ release, but with no follow-through gains. DXY (close 104.01) failed to take out first resistance at 104.23/56. EUR/USD spiked near 1.0725, but managed to limit the damage (close 1.0763). The raise in US/core yields also blocked recent ascent of the yen. USD/JPY closed at 144.95 off an intraday low near 142.5 in Asia.

This morning, Asian equities mostly trade in green. Japan outperforms. Chinese markets are a bit in doubt as price data point to persistent deflation (cfr infra). Today, the eco calendar is empty. Markets look forward to tomorrow’s US November CPI inflation ahead of several central bank decisions, including the Fed (Wednesday), the ECB and the BoE (Thursday). In case of a soft US CPI, we look out if recent lows in yields hold. With respect to the Fed and ECB meetings dots/projections are key. We assume markets will see more than 50 bps expected Fed cuts by end 2024 as ‘confirming’ recent positioning. Question also is how much the ECB will lower its expected path for 2024 and 2025 inflation. A softening of both the Fed and ECB stance might bring the EUR/USD cross rate more in balance. In this scenario, the EUR/USD 1.065 area gradually might provide some support.

News & Views

Chinese deflation intensified in November with CPI dropping from -0.2% to -0.5% y/y, the lowest in exactly three years. The unexpected worsening came amid slumping pork prices, which carry a big weight in the index. Other categories dragging the figure lower were transport and  communication. Core inflation (ex-food and energy), remained positive, though barely, at 0.6%. 0.4% services inflation underscores ongoing weak (domestic) demand as well as the need to support it both fiscally and monetary. Factory inflation (PPI) ventured deeper in deflation territory with a further decline from -2.6% to -3%. The index has been under water since October 2022. The numbers continue to cast a shadow over the Chinese economy, triggering local equity underperformance. The CSI 300 opened 1.5% lower but pared losses to 0.5% in dealings afterwards. USD/CNY trades stronger at 7.185 vs a 7.17 on Friday.

Rating agency Fitch downgraded Slovakia’s credit rating from A to A- with a stable outlook. Key reason for the decision are deteriorating public finances. Fitch estimates debt by 2025 to rise to 62.1%, exceeding the pandemic high of 61.1% of GDP in 2021 and to remain on an upward path (65.5% by 2027). The fiscal deficit is expected to widen to 6% this year from 2% in 2022. Fitch estimates fiscal deficits of 6% in 2024 and 6.5% in 2025. This compares to peer medians of 2.6% and 2% respectively. Adding to the decision are Slovakia’s weakening governance as well as structural challenges, including a heavy reliance on the automotive industry and decreasing labour productivity. The still solid A- rating stems from Slovakia’s eurozone membership that “underpins a relatively stable and credible macro-economic framework and steady EU capital inflows, as well as a competitive export sector and stable foreign direct investment.” Growth is seen picking up from 1.3% in 2023 to 2.3% and 2.8% in 2024 and 2025. Inflation over that time span is seen declining from an average of 11.1% to 5% and 3.1%. Slovakia’s external accounts improved faster than expected, allowing for a rapid narrowing of the CA deficit to just 0.5% in 2023-2025 vs 8.1% in 2022.